As a self-employed person, you have more control over your eventual tax liability than someone who only earns income as an employee.
To take full advantage of that extra control, follow these 5 year-end tax planning tips:
1. Estimate your business income
It’s absolutely essential that you find out where you stand tax-wise – before you start taking other tax planning steps.
You don’t want to make expenditures, for example, in a year when you don’t need the deduction.
If you expect to be in a higher tax bracket this year or next, you’ll want to take as many deductions as possible in the year you are subject to the highest tax rate.
Unless you estimate your business income, tax planning is guesswork at best.
2. Check out your liability for the Alternative Minimum Tax (AMT)
Tax planning usually means finding more deductions and postponing income – but not always.
You might want to do just the opposite if you may lose certain deductions because of the Alternative Minimum Tax.
The Alternative Minimum Tax is a parallel tax system that calculates your tax liability without the benefit of certain tax breaks, such as substantial itemized deductions.
If your income tax calculated by AMT rules is greater than your tax under normal income tax rules, you pay the excess as AMT tax.
3. Time your income
You can’t postpone income simply by not cashing checks that come to you, or by telling customers not to pay you until after the end of the year.
Income is generally taxable when it is available to you.
However, you can time billing near the end of the year to your advantage. You certainly can sell assets at a gain before or after the end of the year, depending on your tax situation.
4. Time your expenditures
There’s always a surge in business equipment sales at the end of the year – and it’s not entirely because computers and printers are a popular holiday gift.
If you buy business assets by December 31, you can start depreciating them this tax year. You may even be able to take a Section 179 deduction and expense the entire cost of the asset in one year.
Business expenditures are counted as made in the year you purchase them, even if you use a credit card or other deferred payment plan and don’t pay for the expenditures until the following year.
On the other hand, if you’re on the cash basis, paying some bills can help lower your bill this year.
Don’t bother buying inventory or supplies that will be part of inventory before the end of the year, unless you need them. You generally don’t deduct the cost of inventory until you sell the product.
5. Contribute to retirement plans
Yes, you have until you file your return next year (April 15) to contribute to your SEP IRA.
The sooner you contribute to your retirement plan, however, the longer time has to work in your favor.
In addition, it’s usually easier to make several smaller contributions than one large one.
When do you start thinking about reducing this year’s tax bill?